29th July 2021 – The Loan Market Association (LMA) and The European Leveraged Finance Association (ELFA) have partnered to publish a best practice guidance to Sustainability Linked Leveraged Loans.

Leveraged loan market participants face unique opportunities to lead the way in sustainability and this guidance seeks to ensure that loan market participants in Europe incorporate ESG provisions in an effective and appropriate way as this practice gains pace. Loan market investors also recognise the threats posed by “greenwashing” and the need to promote transparency on sustainability related features of a transaction.

This Guide provides practical guidance as to the application of the Sustainability Linked Loan Principles (SLLP) to “ordinary” leveraged loans which seek to incorporate any kind of ESG factor or metric (referred to in this guide as Sustainability Linked Leveraged Loans or SLLLs* ). It also sets out what borrowers, finance parties and their respective advisors should consider when looking to integrate sustainability factors into their loan agreements (e.g. ESG-linked margin ratchets). The Guide should be read in conjunction with the SLLP and Guidance on Sustainability Linked Loan Principles.

The LMA and ELFA have addressed several areas in the guidance, summarised below:

• Terminology: As with all areas of industry, there is a common language evolving in relation to sustainability. For those new to sustainability, this can seem daunting and act as a barrier to entry. For that purpose, the LMA has put together a Glossary of Terms common to sustainability lending products generally.
• Roles: The Guide seeks to explain a number of specialised roles that have arisen when applying the SLLP to any loan transaction including ESG rating providers, ESG Consultants, Sustainability Coordinators and External Reviewers.
• Selection of KPIs: Pertinent ESG information should be provided to prospective lenders by the borrower in disclosure and offering materials, helping a company to demonstrate a pre-existing and meaningful commitment to ESG prior to entering the transaction. KPIs, and the associated Sustainability Performance Targets (SPTs), should then be communicated ahead of, or at the time of, marketing the deal for syndication, to allow sufficient time for the prospective syndicate to fully review and, where appropriate, challenge the proposed KPIs, and associated SPTs.
• Reporting & verification: Borrowers should make and keep readily available up to date information relating to their SPTs, with information provided at least once a year and externally verified.
• Documentation: There is currently no template wording available for use in sustainability linked loan documentation due to the varied and precedent-based nature of this market and, as such, a case-by-case approach will be required. The Guide outlines considerations for both Term Sheets and Loan facilities.

*(SLLLs are not an asset class of their own. They are leveraged loans to which the SLLP have been applied. )

Click here to access the guide.